North Dakota's oil boom isn't about low taxes

Gov. Sean Parnell doesn’t like the fact that North Dakota’s oil production surpassed Alaska’s. It’s “not because we are running out of oil” he said while promoting his latest version of oil tax reform during his State of the State speech, “but because we are running behind the competition.” One legislative opponent of tax cuts for the oil industry says it could mean “tens of billions of dollars of lost revenue in the coming decades.” But that’s not an Alaskan voice. It’s a state senator from North Dakota.

The oil coming out of North Dakota’s ground is from reserves that have been known to exist since the 1950s. But the boom they’re experiencing today can be attributed to the high price of oil and industry-wide technological innovation — horizontal drilling and hydraulic fracturing. It has nothing to do with the state’s tax structure. In fact, according to a North Dakota television news station they have “one of the highest oil production and extraction taxes in the nation.” The WDAZ story goes on to say that leaders in the oil industry “have urged lawmakers to lower the tax in order for the state to stay competitive in oil development.”

It seems the oil lobby has convinced some state legislators that it’s a problem which needs fixing now. So Republican Senator Dwight Cook introduced legislation last week which proposes to reduce the state’s oil extraction tax. According to an Associated Press story circulating around the state, “Cook says he worked with oil companies to craft the proposed legislation.”

Now, doesn’t this all sound familiar. However, the opponents of the bill have more than the potential loss of revenue argument on their side. State Representative Corey Mock was quick to point out the obvious. “In the last six years under our current tax structure” he said, “North Dakota went from being the ninth largest oil producing state to the second top producer.” And in agreeing with Mack’s position, the editorial board at the Grand Forks Herald referenced independent studies in Wyoming, Utah and Alberta, Canada which all concluded that taxes aren’t a big driver behind oil industry production and investment decisions.

Could this be why Department of Revenue Commissioner Bryan Butcher said last week that he’s seen no evidence that tax credits to oil companies have led to increased production? Although he’s sure tax increases chase away the oil companies. At least that’s what he claims to have learned after meeting with officials in North Dakota and Alberta in 2011. “Alberta raised its royalty in response to Alaska’s tax hike” he wrote in the Anchorage Daily News, and “industry executives responded by doing exactly what they said they were going to do: They poured more money into Saskatchewan and other states and provinces, sending Alberta into a tailspin.”

So what does all this say about Parnell’s argument that oil producers have chosen to invest in North Dakota instead of Alaska? What happens if Alaska’s Legislature passes his oil tax reform this year and North Dakota gives the oil companies the tax break they want there? Will that make Alaska’s tax structure “uncompetitive” again?

It seems like the oil companies are pitting state and provincial governments against each other in an attempt to lower their tax burden everywhere. And they can do that largely because they control all the information. That’s according to the U.S. Department of Energy (DOE). Their 2012 Annual Outlook is referenced by Parnell to support his to claim that taxes are among the greatest costs discouraging development here. But the entire DOE analysis about North Slope oil production and the operational limits of the Trans Alaskan Pipeline is qualified by this statement – “there is little or no information available to the public on operating and maintenance costs for existing oil fields, how those costs have grown historically as production has declined, or how they might grow in the future.”

If government officials don’t have access to the real costs of extracting and transporting oil in Alaska, then how can they begin to understand the effect of taxes on production and investment? The only conclusion that seems worth trusting is we’ve got to stop believing the oil companies and the politicians who defend them.